Good morning, ladies and gentlemen, and welcome to Tractor Supply Company's Conference Call to discuss Second Quarter 2023 results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. We ask that all participants limit themselves to one question and return to the queue for additional questions. Please be advised that reproduction of this call, in whole or in part is not permitted without written authorization of Tractor Supply Company. And as a reminder, this call is being recorded. I would now like to introduce your host for today's call, Ms. Mary Winn Pilkington, Senior Vice President of Investor and Public Relations for Tractor Supply Company. Mary Winn, please go ahead.

Thank you, Megan. Good morning, everyone. Thanks for taking the time to join us today. On the call for our prepared remarks are: Hal Lawton, our CEO; Kurt Barton, our CFO; and John Ordus, EVP and Chief Stores Officer. Seth Estep, our EVP and Chief Merchandising Officer will join us for the Q&A session. Please note that we have made a supplemental slide presentation available on our website to accompany today’s earnings release. Now, let me reference the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. This call may contain certain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the company. In many cases, these risks and uncertainties are beyond our control. Although, the company believes the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations, or any of its forward-looking statements, will prove to be correct, and actual results may differ materially from expectations. Important Risk Factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included at the end of the press release issued today and in the company's filings with the Securities and Exchange Commission. The information contained in this call is accurate only as of the date discussed. Investors should not assume that statements will remain operative at a later time. Tractor Supply undertakes no obligation to update any information discussed in this call. Given the number of people who want to participate, we respectfully ask that you limit yourself to one question. If you have additional questions, please feel free to get back in the queue. I appreciate your cooperation on this. We will be available after the call for follow-ups. Now, it is my pleasure to turn the call over to Hal.

Thank you, Mary Winn. Good morning, everyone, and thank you for joining us. I'd like to begin by thanking the 52,000 Tractor Supply team members for their commitment to each other and our customers and for their dedication to serving life out here. Our team is executing at a high level and did a nice job nimbly adjusting in the second quarter. We're operating in a tougher environment than we expected at the beginning of the quarter, and certainly tougher than what we forecasted as we entered the year. Consumer spending continues to shift in favor of services. Shoppers that are tired of inflation are being judicious on their baskets. Consumers continue to pull back on discretionary purchases. And additionally, our business was further impacted by the abnormal seasonal trends, particularly in the month of June. Despite this environment, we still expect 2023 to be a pretty solid year. Our customer is healthy and we're gaining share outgrowing our market by 2x, and we are significantly outpacing total U.S. retail sales growth. We anticipate that we will have positive sales comps and positive comp transactions for the year, albeit in the low-single-digits range. And importantly, net sales and earnings will grow strong mid-single-digits on top of a 53rd week last year. We have a long track record of growth and high expectations of performance. We view our underperformance to these expectations as specific to the current environment. The team has dialed-in and understands the challenges. For the remainder of the call today, I'll speak to a few highlights of the second quarter and then share an update on our Life Out Here strategy. John Ordus will then provide greater insights on our real estate strategy and our plans to accelerate our store growth. And then Kurt will follow John and…

Thank you, Hal. It's an exciting time for the store operations in real estate team. As we embark a new ways to capture growth and market share, while also driving efficiencies in our real estate processes. Over the last year, we've installed new leadership and talent in our real estate team. This has allowed us to reevaluate where we are in the natural progression of our store growth plans and our ability to leverage our real estate capital structure. This new approach will allow us to realize cost savings and be more nimble with our store portfolio. Our strong outlook for new store growth is direct correlation of the millions of new customers we have acquired and our overall sales performance over the last several years. This provides us with nearly a decade of new store growth in the United States. We believe these are low risk, high return, organic growth opportunities. We anticipate accelerating our new store growth from approximately 70 stores this year to 80 in 2024 and 90 new stores in 2025 and beyond. Opening highly productive new stores is a core strength and competency of Tractor Supply. We continue strong new store productivity metrics with performance outpacing our historical investment thesis, and our stores are profitable in year one. As part of our growth plans, let's start with new stores. We have developed a new sales forecasting model to determine new stores mature sales, and pro forma results to develop our total market store growth opportunity of 3,000 stores. This was the first update to our modeling process in four years. We have infused the process with a machine learning model and insights from our 31 million Neighbor's Club members. This gives us tremendous confidence to raise our outlook by 200 stores for a total of…

Thanks, John, and good morning to everyone on the call. Turning to our second quarter results. While our sales trends were below our expectations, I commend the team on how they have remained nimble and steadfast in our commitment to be the dependable supplier for Life Out Here. In many ways, our second quarter top-line results were very consistent with our results in the first quarter with strong CUE growth, flattish, seasonal performance, and a decline in big ticket sales. Our comparable store sales growth was the strongest in the Far West, South Atlantic and Texas, Oklahoma. The strength of these regions was offset by pressure in the Northeast and Midwest regions were seasonal trends added incremental pressure on consumer demand. Comp sales in the quarter benefited by about 5 percentage points from retail price inflation. Most of this inflation reflects retail price increases that were put in place in the second half of 2022 that we have not laughed as of yet. Much like the first quarter, the benefit of price inflation to our average ticket growth was offset by the impact of three factors. First, the average ticket was impacted by the softness in big ticket and declines in seasonal categories, which run at a higher average ticket. Second, we also experienced softer sales in discretionary and impulse add-on items. Third, on a positive note, we also saw our customers shopping us more frequently with a slight reduction in the number of items per basket. Overall, our customers are buying more units or pounds from us in total. Moving down our income statement. Our gross profit increased 9.3% to $1.51 billion. Gross margin increased 69 basis points to 36.2% from 35.5% in the prior year's second quarter. Gross margin was a highlight for the quarter as we continue…

Thanks, Kurt. Stepping back, Tractor Supply has achieved remarkable growth over the past few years and the team has done an excellent job scaling our processes, capabilities, and organization to manage this growth. Key operational areas like inventory and payroll grew materially but at a lesser rate than sales and were always in control. Key philosophies like EDLP were re-embraced and our marketing media mix shifted fully away from print to digital. And the combination of these two enabled our promotional activity to achieve all-time lows and we remain there. In addition to these efforts, we launched our Life Out Here strategy to continue the ongoing transformation of our business. This strategy helped lock-in new customers, substantiate our market share gains, and is a platform for our future growth. The timing could not have been better. At the halfway mark of 2023, it is shaping up to be a solid year for Tractor Supply on top of three extraordinary years. Our market is stable and our customers remain healthy. The team is effectively controlling what we control. As we celebrate our 85th anniversary, Tractor Supply remains a unique highly differentiated retailer. Our needs-based business model has a track record of growing through various economic conditions. As a company, we have a proven ability to manage through dynamic environments whether that is a macroeconomic or seasonal weather trends. Our customers and team members are passionate about the Out Here lifestyle and they prioritize it. Our customers over indexes homeowners, landowners, pet owners, and animal owners. As a market leader, we have substantial advantages that are getting stronger every day. Additionally, investment in our Life Out Here strategy has critical mass. The natural evolution of our real estate strategy is furthering our competitive advantages. We see meaningful growth potential in our markets. I remain extremely confident that we have a tremendous runway growth ahead of us, and with the right team and the right strategy, we're continuing to build a strong foundation for the future. With that, let's open up the call for questions.

Thank you. [Operator Instructions]. Our first question will come from the line of Karen Short with Credit Suisse. Your line is now open.

Hi, thanks very much for taking my question. I'm going to just kind of roll two into one, if that's okay. So the first question and tied into the second was that I think you always had the assumption that your kind of comp would be 1% to 2% above GDP and that relationship doesn't seem to be holding right now. So I just want to talk about that. And then excluding the benefit of the sale leaseback, you had also kind of indicated 2023 would be the peak investment period for you, and then we should start see to see operating margin expansion in 2024. Is this still your thinking? And I guess I'm again excluding the sale leaseback development and then benefit. Thanks very much.

Hey, Karen, good morning, and thanks for joining the call. On your first part of the question, a bit to my comments earlier, we see this period of time as a bit of an aberration versus our kind of ongoing growth algorithm. As you see in GDP and you see where PCE is going. And then you see the shift from goods to services right now. As you services historically been 68%, 69% of spend cons -- goods kind of 31%, 32%. As you know, goods kind of shifted up to say 35%, 36% during the pandemic. We're kind of halfway back on that March back to 31%. So that as we said in our prepared remarks is a bit of a headwind in our business, but certainly expect that we've got maybe halfway to go on that and then it would level back out in its normal equilibrium and would expect that our growth algorithm would return to that 1% or 2% above GDP growth in the guidance we've given historically, again, we just view this period of time as a bit of an aberration from that long-term algorithm just given the macro dynamics. And then the second thing is, yes, no, no change to the guidance so to speak that we've given on the out year certainly expect 2023 to still be our peak investment year. As you mentioned, the sale leaseback is really just a $0.20 plus or minus that'll be in every single one of our years going forward as an add or two our EPS. But expect that we'll be at our peak investment period this year and that will start to moderate down next year with an opportunity for margin expansion accordingly.

Thank you, Karen. Our next question comes from the line of Scot Ciccarelli with Truist. Your line is now open.

Good morning, guys. Scot Ciccarelli. So I have a question on the real estate changes as well. I mean, it makes sense that you guys can improve your cost structure as you take ownership of the build, but if you would expect your stores to remain productive over a long stretch of time. Is this a better model to actually own the stores outright rather than lease in the first place? How obviously you have some history with that at one of your prior shops. Or does this real estate shift suggest that may -- we may see changes to the existing footprint, whether it's changing locations kind of relocation type scenario or different sizes, et cetera. Thanks.

Hey Scot, this is Kurt. Good morning. And the real estate model as you think about the opportunity that we have to drive a strong performance of new stores that we've seen since there's a structural shift in the tailwinds into the rural economy, into our markets, the new stores are performing well. We -- as John mentioned, we built a real estate team that is ready to begin to ramp back up to a 90-ish new store. The sale leaseback of existing stores fits right in with that. We're an asset light model. Do not believe owning stores fits, which is why we have over 95% of our stores under a lease. And over time, 30 plus years, we've accumulated not strategically a number of owned stores. There's a bit of pent-up value in these stores, and it's a great time right now to use those stores to fuel and be able to keep a cash neutral value to execute on a strategy that allows us to even further drive new stores, bring efficiency in the new store model. So I look at those, we look at those very much tied in between as a great way to fund a model that drives greater long runway, greater TSR in the overall long-term algorithm. And I really keep both of those very much tied together as part of a key part of our operations.

Thank you, Scot. Our next question comes from the line of Michael Lasser with UBS. Your line is open.

Good morning. Thanks a lot for taking my question. So you deemed a 2.5 comp in the second quarter with 500 basis points of like-for-like price inflation. You probably got some demand that was shifted out of 1Q into 2Q. And your guidance implies you're going to do call it a 1 to 2 comp for the back half of the year, even as you lap some of the big price increases from last year. So can you give us a sense for what is going to accelerate or improve in the business to offset the mitigating contribution from inflation? And have you already started to see that quoted again? Thank you.

Hey Michael, good morning. Couple things. First off, I wouldn't -- I don't think it's a fair comment to say we had sales from Q1 shift into Q2. I just think given the weather and the seasonality that we had this year, we don't have any data or insights or customer purchase data that would suggest that there is any pull or kind of deferral into Q2 or weather-related kind of shifting into Q2. So I'd say that's not a something that we have to offset as you think about from a sequential perspective. The second thing I'd say is we have seen comp transactions sequentially improve throughout the quarter and continuing into Q3 and expect that that will be the case throughout the year. And on AUR as we've talked about all along, we expect that that will moderate through the year, big ticket lessens as a percent as we get through the year. So that provides a bit of a kind of mix and benefit. And then, lastly, on the UPT, we do think we're at close to the bottom of units per transaction. If you go back and look over the last 15 years at our units per transaction trends, we reached an all-time high during the pandemic as people were stocking up and consolidating their trips. We're now much closer to the -- where we were during the 2008 Great Recession and kind of reached that, that, that bottom. And so we expect that will be a lesser headwind as we move forward. So when you put those things all together that ends up with the guidance that we shared. And I think we try to be as conservative as possible on the low end and realistic as possible on the high end.

Thank you, Michael. Our next question comes from the line of Chuck Grom with Gordon Haskett Research Advisors. Your line is now open.

Hey thanks. Good morning. Hal, there's some concern out there that has households continued to revert back to pre-COVID behaviors that some of the gains that Tractor's enjoyed over the past three years when sales per store has moved from call it $4 million to $6 million will be given back. I'm curious how you'd address this concern and can you highlight the key drivers that a Tractor can control in the back half and into 2024?

Yes. Hey Chuck, and good morning, and thanks for joining the call. As I think we all know in this call, this has been a question for 18, 24 months. And what I'd say is we continue to see a very healthy customer base. Our active customers were at all-time highs this quarter. We saw positive comp transactions in the quarter. And if you look at the categories that are driving the footsteps and driving our customers, it's things like pet, animal, and those are based on counts of population out there in each of those categories. And so -- and then the last thing I'd point out is our share gain. At least half of the volume that we've cap -- that we've grown over the last handful of years has been share related. And so if I point to share active customers, comp transactions, pet, animal and look at those things, it's just a very different business than many of the other companies that kind of had a pandemic benefit reverted whether it was technology-related companies that had a user base that shifted online and then pivoted back or maybe something that's home related, electronics related. We're just a very different business and don't see any elements of reversion in our customer base or business.

Thank you, Chuck. Our next question comes from the line of Daniel Imbro with Stephens. Your line is now open.

Yes. Hey, good morning, everybody. Thanks for taking the questions. Hal, I wanted to follow-up on who that new customer is. How is the retention trending? I think you mentioned they're younger, so I'm curious, is there a difference in spending power between this most recent vintage of new customers and the historical ones? And are we seeing any change in the neighborhood -- Neighbor's Club adoption? I would think the push towards value makes the loyalty program more valuable, but can you provide any commentary or quantification around how that's trending differently?

Yes. Hey Daniel, and good morning. Start out by first thing, we're very pleased with the trends we're seeing in new customers. We had record high new customers in 2020 and 2021. As we've talked about on past calls, our Neighbor -- and I mentioned our prepared remarks, the Neighbor's Club program being re-launched in April of 2021 was incredibly well timed as it allowed us to lock those new customers in. We've grown I think it's 15 million members over the last three years in our Neighbor's Club program. And we've had increased retention rates of our Neighbor's Club program each of the last few years too. So we've lost those cohorts in, they're growing with us and they're remaining active. Certainly as we got into 2022 and things balance some, we saw our new customer counts on a year over basis trend down it is that is now leveled out. And we feel really good about our new customer trends as we move forward and sequentially that should be helpful as we look at year-over-year improvements. On the Neighbor's Club program continue to be very pleased with the 31, 32 million members of Neighbor's Club that we have, our top tiers are -- has grown and we reached a record number of customers in our top tier. Retention rates remain at all-time highs and continue to improve. And our Neighbor's Club members continue to out comp our overall base. And again, that's on 75% of our sales. So as I've said several times, our customer base is very healthy, record active customers, positive comp transactions, solid trends and new customers, and feel really good as we're heading into the third quarter on our active customer base and our strength of our customer.

Thank you, Daniel. Our next question goes to the line of Seth Sigman with Barclays. Your line is now open.

Hey, good morning, everyone. So my question is around the second half guidance, the implied margins, it does seem like you're baking in potentially more margin improvement in the second half of the year versus the first half of the year, despite potentially lower comps. And I know some of that now is the sale leaseback. But I guess two questions. One, can you just remind us and maybe help bridge some of the drivers for the second half margin expansion. And then second, how do you think about potentially reinvesting more of that margin improvement given the sales performance that you're seeing? Thank you.

Hey Seth, this is Kurt. I'll take the first part of that question and I'll let Seth answer the second part in regards to the reinvestment of any margin. The performance on an operating margin standpoint for the second half on a gross margin standpoint will be very similar to second quarter. We continue to see, and as we signaled and guided at the beginning of the year, we have strong performance from everyday low pricing. We expect to continue to see transportation being the biggest benefit in fueling of the gross margin expansion. As a reminder, over the two years where transportation costs were pressured, we absorbed most of that and this is anticipating somewhat transitory. We're getting the return on that in 2023. On an SG&A standpoint, what really -- that's really the big difference in say the second half as you're observing, we expect Q3 on an SG&A standpoint, excluding the sale leaseback benefit to perform very similar to Q2 in that 70, 80 basis points deleverage principally from the investments in the business, but Q4 really has the best compares. And so in line with what we expect to go into the year when you look back at the fourth quarter of last year where while we had robust sales, we had increased cost in repairs from the storm, we had Orscheln acquisition transition, we had higher incentive compensation. We are lapping that and we expect in the fourth quarter, excluding the benefit from any sale leaseback to really still only have a modest level of SG&A deleverage principally on the compares. So if you hold the gross margin, you get better performance on SG&A. It's really about how well we're managing to spend. And I also can't ignore that the team has done an excellent job scaling the cost, leveraging investments we made, we are seeing significant efficiencies, even SG&A on the distribution and supply chain side of the business driving lower cost and some efficiencies beyond our expectations. With that, Seth, I'll -- maybe you can address the second part of that question.

Yes. Thanks, Kurt. Yes. In relation to should we reinvest and how we think about that? First, I would just say EDLP remains our true north, and that strategy continues to pay off for us. If you look at the success we're having with our accumulated activity, our transactions, and our continued record kind of customer counts that are coming to Tractor Supply, and our plan is to continue to maintain that EDLP focus and not to revert from that. We will reinvest if we decide we need to, but we do not foresee a need for any meaningful type of reinvestment. And lastly, I would just kind of say is that, our inventory position continues to be very strong and very favorable. And as we look ahead to the back half, instead of kind of a reinvestment of margin, we've put ourselves in a position to really partner with our key suppliers to go out there, get special buys, go after key values, and make sure we have meaningful values for our customers to drive the full basket. So I'm very pleased. I think we have an incredible team. We got a great reset activity coming forward that we can manage the top-line or we can drive the top-line and drive market share while at the same time really be able to manage the margin structure as well.

Thank you, Seth. Our next question comes from the line of Peter Benedict with Baird. Your line is now open.

Hey, good morning, guys. So I want to maybe Hal speak a little bit more about the historical context here. I mean, you started to mention some things in answering Mike Lasser's question, but obviously we're coming off of an unusual period with COVID. You're starting to see this normalization occur. Your -- the behavior of your consumers changing. Maybe just talk a little bit more about what that means to the credit, the basket trends and then kind of what we think that kind of is indicating here over the next kind of 6 months to 12 months. I know you're assuming this will continue in the back half of this year, but how are you just thinking about it longer-term? Thank you.

Yes. Hey Peter, and good morning. If you look back over 30 years of this company's comp growth, it's been almost equally split 50:50 between average ticket and comp transactions. And if you look really at our body of work over the last 3.5 years during the pandemic, there's definitely been periods of time of inflation, periods of time of UPT increases. But when you look at it collectively, it's about 50:50 comp transactions and average ticket. And that's just the formula that has really just kind of always been there in our historical numbers. And our expectation as that we -- as we navigate the current economy that we're operating in and consumer behaviors that we will migrate back to that historical blend as we kind of exit this year and move into next year. And there's going to be some ins and out, as we said in the second half of this year where we expect UPT, the headwind there to kind of level out as we get towards the end of the years. And we expect AUR to kind of come down. Those will work a little bit in together, big ticket becomes a lesser portion of sales. And so we get that mixed benefit there. And that all works out to an okay average ticket. We're seeing comp transactions increase that kind of balances a little bit right now and ends up delivering on the kind of implied guidance that we have for the second half of the year. And on the comp transactions, as I said, we had all-time record active customers this quarter. Our active customer base grew this past quarter. Their shopping is more frequently. We're seeing them do a little bit of deconsolidation of their trips as Kurt mentioned. But we're also gaining significant share in footsteps. And in categories like pet food where we continue to take substantial share, we're really viewed as kind of a value play, almost a warehouse like model. I mean, our average pet food bag size is 35 pounds, and that's very different than say, pet specialty and others. And if you look at a price per pound basis, I mean, we can be as good as 20%, 25%, 30%, advantage on a price per pound basis. And so we're just that naturally drives footsteps in our store. So the mix will evolve a little bit throughout the balance of this year, but we've certainly bought it all through and expect that over time it'll revert back to its historical performance of kind of a 50:50 blend.

Megan we'll go to the next caller, please.

Absolutely. Thank you, Peter. Our next question will come from the line of Peter Keith with Piper Sandler. Your line is now open.

Hi everyone, hope everyone's good. Good morning. I wanted to just follow-up on the new real estate strategy and just putting in the context of your long-term algorithm. Is it meaningful enough that perhaps some of those targets on an annualized basis could be adjusted? I'm guessing I'm looking specifically at the sales growth target of 6% to 7% and then the EPS growth target of 8% to 11%.

Hey Peter, this is Kurt. The new real estate model, one of the many things that we're excited about is not only does it give us the long runway, but to your point, move from 70 to 90 stores a year. It's driving incremental sales. Those new stores have the -- expected to have the consistent tailwind into the comps. We believe this new real estate strategy not only gives us a longer runway, but really strengthens the long-term algorithm, gives us more confidence in that and bolsters the higher end of that. Mid-year through the year, we typically don't and aren't adjusting our long-term guidance we certainly will factor all of that in along with the outlook for 2024 as we report on our Q4 earnings, typically refreshing any adjustments to our long-term targets at this point. But we're excited about what it does for the long-term algorithm and the overall total shareholder return.

Thank you, Peter. Our next question will come from the line of Brian Nagel with Oppenheimer. Your line is now open.

Hi, good morning. Thanks for taking my question. So the question I have maybe just dig a little bit deeper into the comps around the trends seasonal sales. So the -- what I would ask there is, you talked a lot about the weakness here. It falls similar to what we saw in Q1, but any geographic differences that, that you noticed? And then as we move down to Q3, recognizing you have trim guidance from a year, but did you see any type of rebound in seasonal sales as maybe some of these weather, some of them not all, some of these weather events have started to abate.

Yes. Hey, Brian, and good morning. As I mentioned in my prepared remarks, the seasonal business was kind of on expectations in the months of April and May. We had talked about that in our earnings calls for Q1 and given kind of a quarter-to-date perspective on that. And also just our commentary through the quarter publicly. And then June, as I mentioned, we saw significant underperformance in our seasonal business. And it -- that was really the bulk of our myth for the entire quarter was our seasonal business in the month of June. As I mentioned, it was a topsy-turvy quarter particularly in the month of June with all the various environmental conditions that were out there. But to your point, we did see bright spots at moments in time throughout the quarter as well as certain parts of the geography. As an example, the kind of 10 days leading up to Memorial Day were very good from a seasonal perspective and a total business perspective as the sun shine was kind of out almost across the entirety of the country. And we had a really good 10-day run there. Historically you see something like that for at least a few weeks of the spring, we just only had that kind of short period. But if you look in the Southeast, in the South Atlantic, as Kurt called out, we had excellent performance there. From time to time in the both Texas home and the Far West, when we had good seasonal performance, we had strong -- I mean, we had good weather, we had seasonal performance there. And then as Kurt called out some of our underperforming regions around the Midwest and the Northeast, I mean, the Midwest went straight from winter to drought. And in the month of June, it rained 21 days in the Northeast. And so those were dominant, those were large contributors to the underperformance in the month of June. So anyway, that's just a little bit of more depth and commentary there, Brian.

Thank you, Brian. Our next question will come from the line of Zach Fadem with Wells Fargo. Your line is now open.

Hey, good morning. Hal, you had hinted at another iteration of the Neighbor's Club program at some point in 2024. So first of all, can you talk about the lift, the comp lift you saw the last time you updated the program? And is there any info you can share on the types of changes that are on the table that you think could make the program better?

Hey, Zach, and good morning, and very perceptive. First off, I'd say on the comp, it's hard to calculate that both given the magnitude of the comps that we had in that period. But what I would -- given the magnitude of the comp, but what I would say is we can absolutely look at the 15 million Neighbor's Club members that we've added over the last few years and when they started to shop with us and how we locked them in using the Neighbor's Club program. And I've spoken to that many times. But we feel great about the cohorts from that first revision of our Neighbor's Club program. As we look ahead, there's a lot of -- we've been getting a lot of feedback from our customers and we can make it even better in the next -- in the next version. Doing some things to uniquely call out certain characteristics of customers if they're say a horse owner or say a military veteran, what can we do to better tailor that when they self-identify? There's also some things we can do on our rewards and maybe bite sizing the rewards up to giving some $5 rewards instead of always $10 rewards. We're also looking at a way to add, say, a fourth perhaps even the fifth tier. We -- as we mentioned, we've got our largest number of highest value customers ever. How do we actually take it up another tier and even give further rewards for those that are in that tier. So looking at a lot of ways to again it's -- that program locks our customers in. It encourages spin and encourage migration. It really encourages purchasing on big ticket and then redemption on the queue businesses. We're just looking for ways to reinforce that more and also make it more personable for our customers. And the team's hard to work on it, and we have more detail on it. We look forward to sharing it.

Megan, we'll take one more question as we're at the top of the hour. Take one more.

Absolutely. Our final question will go to the line of Steven Zaccone with Citigroup. Your line is now open.

Great. Good morning. Thank you very much for squeezing me in. So I wanted to just go back to the sales guidance change just to better understand how much of the change in sales guidance is really due to seasonal missing expectations versus the discretionary being a bit weaker. In the -- in one sense, the first half was really choppy with weather throughout the year, as you've discussed. So that'd be helpful. And then when you think about getting back to mid-single-digit comps, which is the original guidance, what's the biggest kind of drivers to get you back to that trend in the business? Thank you.

Hey, Steven, this is Kurt. Appreciate the question. The -- as we talked about when Brian asked the question on Q2, I'll go back to the fact that a bit of Q2's performance, you have to acknowledge that as we saw some differentiation between some of the geographies that indicates weather was a contributor, but even in some of the strong geographies and across all that we saw a pullback on some of the discretionary. We are going into the second half acknowledging that, that it's a different seasonal period of time, particularly in the Q4. We plan for base weather. We do not plan for more favorable weather. And at this point on the seasonal categories, unless, we look at it as base and unless there's a strong demand for our product because of a shift in weather seasonal, the consumer on some of the discretionary items is a little bit more prudent on that today. And then also we acknowledge, as I mentioned, some of the impulse in discretionary category. So we anticipate that the consumer behavior is in line with the first half of the year. We're taking a reasonable prudent approach there. And then we're also factoring in the strong winter storm that we had in the fourth quarter that we're lapping up against. But underpinning all of that is a strength in our year-round core business running in the mid-single-digits. Comp transactions still performing strong at this point, and we've got a really good healthy customer. Hal mentioned some of the shifts that we've seen, UPT coming off some of its highs as you revert back to the mid-single-digits, it's really a matter of UPT and the consumer coming off of the cycle as we've seen in the last couple quarters and really having more strength in the size of their basket and the demand for the discretionary. And we could be a couple quarters away from that. And we factor that into our guidance. Our guidance is reasonable. We're not factoring in a favorable shift in the consumer or a strong shift in favorable weather. It's taken all those factors that we've seen year-to-date as well as some of the headwinds in the second half.

Thank you, Steven. That will conclude our question-and-answer session. So at this time, I'll pass the conference back over to Mary Winn for closing remarks.

Thank you, Megan. This will conclude our call. I am available for any questions or follow-up. So please feel free to reach out and we look forward to speaking to you at our Q3 earnings call in October. So thank you.

That concludes today's conference call. Thank you for your participation. I hope you have a wonderful day.